Is Russia on the Brink of Collapse?

Not a long time ago, with flowing foreign investments and rising oil prices, Russia’s economic growth outlook was startling. Yet, it didn't last that long. The global economic crisis which leads to a sharp drop in commodity prices is now endangering Russia’s ambition to become an economic power.

With its stabilization fund and the world’s third-largest foreign currency reserves, Russia should have been better prepared for the most recent global economic crisis. However, the country has allowed companies to borrow cheaply abroad in order to finance long term investments and as a result Russia is likely to run a current account deficit this year, the first since 1998. Moreover, since the intensifying of global crisis and the lost of the confidence on the government after war in Georgia, the foreign capital is flowing out of Russia and the crisis in the financial sector has started to hit the real economy. Factories are cutting jobs or closing. Inflation is high and interest rates are rising, making credit less available. To make things even worst, the problem of corruption is not yet being solved and small and medium size businesses are likely to suffer even more. The Russian government is now spending some of its foreign currency reserves in a desperate attempt to prevent sharp moves in the exchange rate but the ruble is likely to remain under sharp downward pressure since the price of oil has been falling dramatically and investors will probably continue to sell the currency in anticipation further depreciation.

Anna Fedec, contact@tradingeconomics.com11/29/2008 9:51:32 AM

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